Different practical approaches can be used to determine the fulfilment cash flows of groups
of contracts that affect or are affected by cash flows to policyholders of contracts in other
groups. In some cases, an entity might be able to identify the change in the underlying items
and resulting change in the cash flows only at a higher level of aggregation than the groups.
In such cases, the entity should allocate the effect of the change in the underlying items to
each group on a systematic and rational basis. [IFRS 17.B70].
After all the coverage has been provided to the contracts in a group, the fulfilment cash
flows may still include payments expected to be made to current policyholders in other
groups or future policyholders. An entity is not required to continue to allocate such
fulfilment cash flows to specific groups but can instead recognise and measure a liability
for such fulfilment cash flows arising from all groups. [IFRS 17.B71].
It is observed in the Basis for Conclusions that the Board considered whether to provide
specific guidance on amounts that have accumulated over many decades in participating
funds and whose ‘ownership’ may not be attributable definitively between shareholders
and policyholders. It concluded that it would not. In principle, IFRS 17 requires an entity
to estimate the cash flows in each scenario. If that requires difficult judgements or
involves unusual levels of uncertainty, an entity would consider those matters in
deciding what disclosures it must provide to satisfy the disclosure objective in IFRS 17
(see 16.2 below). [IFRS 17.BC170].
The Board considered whether prohibiting groups from including contracts issued more
than one year apart would create an artificial divide for contracts with cash flows that
affect or are affected by cash flows to policyholders in another group. The Board
acknowledged that, for contracts that fully share risks, the groups together will give the
same results as a single combined risk-sharing portfolio and therefore considered
whether IFRS 17 should give an exception to the requirement to restrict groups to
include only contracts issued within one year. However, the Board concluded that
setting the boundary for such an exception would add complexity to IFRS 17 and create
the risk that the boundary would not be robust or appropriate in all circumstances.
Nonetheless, the Board noted that the requirements specify the amounts to be reported,
not the methodology to be used to arrive at those amounts. Therefore, it may not be
necessary for an entity to restrict groups in this way to achieve the same accounting
outcome in some circumstances. [IFRS 17.BC138].
11.2 Insurance contracts with direct participation features
IFRS 17 identifies a separate set of insurance contracts with participation features
described as insurance contracts with direct participation features. These contracts
apply an adapted version of the general model in which, to summarise, the changes in
the contractual service margin are mostly driven by the movements in the assets
‘backing’ the contracts or other profit sharing items (referred to as ‘underlying items’)
rather than by the fulfilment cash flows of the insurance contract liability. Use of this
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adapted model is mandatory for those groups of insurance contracts which meet the
criteria (see 11.2.1 below). Contracts with participation features are significantly
different across jurisdictions. Not all groups of contracts with participation features will
meet the criteria to be accounted for as direct participation contracts.
Conceptually, insurance contracts with direct participation features are contracts under
which an entity’s obligation to the policyholder is net of: [IFRS 17.B104]
• the obligation to pay the policyholder an amount equal to the fair value of the
underlying items; and
• a variable fee that the entity will deduct from the obligation in exchange for the
future service provided by the insurance contract comprising:
• the entity’s share of the fair value of the underlying items; less
• fulfilment cash flows that do not vary based on the returns on underlying items.
This approach is commonly referred to as the ‘variable fee’ approach.
The Board concluded that returns to the entity from underlying items should be viewed
as part of the compensation the entity charges the policyholder for service provided under
the insurance contract, rather than as a share of returns from an unrelated investment, in
a narrow set of circumstances in which the policyholders directly participate in a share of
the returns on the underlying items. In such cases, the fact that the fee for the contract is
determined by reference to a share of the returns on the underlying items is incidental to
its nature as a fee. The Board concluded, therefore, that depicting the gains and losses on
the entity’s share of the underlying items as part of a variable fee for service faithfully
represents the nature of the contractual arrangement. [IFRS 17.BC244].
IFRS 17 requires the contractual service margin for insurance contracts with direct
participation features to be updated for more changes than those affecting the
contractual service margin for other insurance contracts. In addition to the adjustments
made for other insurance contracts, the contractual service margin for insurance
contracts with direct participation features is also adjusted for the effect of changes in:
[IFRS 17.BC240]
• the entity’s share of the underlying items; and
• financial risks other than those arising from the underlying items, for example the
effect of financial guarantees.
It is stated in the Basis for Conclusions that the Board decided that these differences are
necessary to give a faithful representation of the different nature of the fee in these
contracts. The Board concluded that for many insurance contracts it is appropriate to
depict the gains and losses on any investment portfolio related to the contracts in the
same way as gains and losses on an investment portfolio unrelated to insurance
contracts. [IFRS 17.BC241].
11.2.1
Definition of an insurance contract with direct participation features
An entity should assess whether the conditions for meeting the definition of an
insurance contract with direct participation features are met using its expectations at
inception of the contract and should not reassess the conditions afterwards, unless the
contract is modified (see 12 below for modifications). [IFRS 17.B102].
Insurance contracts (IFRS 17) 4547
Insurance contracts with direct participation features are insurance contracts that are
substantially investment-related service contracts under which an entity promises an
investment return based on underlying items (i.e. items that determine some of the
amounts payable to a policyholder). Hence, they are defined as insurance contracts for
which: [IFRS 17.B101]
• the contractual terms specify that the policyholder participates in a share of a
clearly identified pool of underlying items;
• the entity expects to pay to the policyholder an amount equal to a substantial share
of the fair value returns on the underlying items; and
• the entity expects a substantial proportion of any change in the amounts to be paid
to the policyholder to vary with the change in fair value of the underlying items.
When an insurance contract is acquired in a business combination or transfer the
criteria as to whether the contract applies the variable fee approach should be assessed
at the business combination or transfer date (see 13 below).
Situations where cash flows of insurance contracts in a group affect the cash flows of
contracts in other groups are discussed at 11.1 above.
The pool of underlying items can comprise any items, for example a reference portfolio
of assets, the net assets of the entity, or a specified subset of the net assets of the entity,
as long as they are clearly identified by the contract. An entity need not hold the
identified pool of underlying items (although there are accounting consequences of this
– see 15.3.1 below). However, a clearly identified pool of underlying items does not exist
when: [IFRS 17.B106]
• an entity can change the underlying items that determine the amount of the entity’s
obligation with retrospective effect; or
• there are no underlying items identified, even if the policyholder could be
provided with a return that generally reflects the entity’s overall performance and
expectations, or the performance and expectations of a subset of assets the entity
holds. An example of such a return is a crediting rate or dividend payment set at
the end of the period to which it relates. In this case, the obligation to the
policyholder reflects the crediting rate or dividend amounts the entity has set, and
does not reflect identified underlying items.
It is explained in the Basis for Conclusions that the Board believes that, for the variable
fee approach to be applied, the contract must specify a determinable fee and because
of this a clearly identified pool of underlying items must exist. Without a determinable
fee, which can be expressed as a percentage of portfolio returns or portfolio asset values
rather than only as a monetary amount, the share of the return on the underlying items
the entity retains would be entirely at the discretion of the entity and, in the Board’s
view, this would not be consistent with being equivalent to a fee. [IFRS 17.BC245(a)].
However, IFRS 17 does not mention a stated minimum fee.
The word ‘share’ referred to above does not preclude the existence of the entity’s
discretion to vary amounts paid to the policyholder However, the link to the underlying
items must be enforceable. [IFRS 17.B105].
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An entity should interpret the word ‘substantial’: [IFRS 17.B107]
• in the context of the objective of insurance contracts with direct participation
features being contracts under which the entity provides investment-related
services and is compensated for the services by a fee that is determined by
reference to the underlying items; and
• assess the variability in the amounts:
• over the duration of the group of insurance contracts; and
• on a present value probability-weighted average basis, not a best or worst
outcome basis.
Although there is no quantitative threshold for ‘substantial’, the Basis for Conclusions
observes that the entity should expect to pay to the policyholder an amount equal to
a substantial share of the fair value returns on the underlying items and that a
substantial proportion of the amounts paid to the policyholder should also vary with
a change in the fair value of the underlying items and it would not be a faithful
representation if this did not occur. [IFRS 17.BC245(b)]. This raises the question as to
whether the variable fee approach can be applied to contracts where the return to
policyholders is determined on a basis other than fair value (e.g. at amortised cost). In
February 2018, in response to a submission to the TRG, the IASB staff observed that
contracts which provide a return that is based on an amortised cost measurement of
the underlying items would not automatically fail the definition of an insurance
contract with direct participation features. Entities expectations of returns would be
assessed over the duration of the contract and therefore returns based on an amortised
cost measurement might equal returns based on the fair value of the underlying items
over the contract duration. The TRG members noted the IASB’s staff conclusion that
the variable fee approach could be met when the return is based on amortised cost
measurement of the underlying items.34
IFRS 17 further explains that if, for example, the entity expects to pay a substantial share
of the fair value returns on underlying items, subject to a guarantee of a minimum return,
there will be scenarios in which: [IFRS 17.B108]
• the cash flows that the entity expects to pay to the policyholder vary with the
changes in the fair value of the underlying items because the guaranteed return and
other cash flows that do not vary based on the returns on underlying items do not
exceed the fair value return on the underlying items; and
• the cash flows that the entity expects to pay to the policyholder do not vary with
the changes in the fair value of the underlying items because the guaranteed return
and other cash flows that do not vary based on the returns on underlying items
exceed the fair value return on the underlying items.
The entity’s assessment of the variability will reflect a present value probability-
weighted average of all these scenarios.
In reality, as many participation contracts contain guarantees, the question as to
whether a contract is one with direct participation features or not depends on the effect
of the guarantee on the expected value of the cash flows being insignificant at inception.
It does not mean that there can be no scenarios in which the guarantee ‘kicks in’.
Insurance contracts (IFRS 17) 4549
Instead, it does mean that the effect of those scenarios on a probability-weighted basis
should be such that a substantial share of the expected returns payable to the
policyholder are still based on the fair value of the underlying items. Considering the
impact of options and guarantees on the eligibility criteria will have to be based on the
specific facts and circumstances and requires the use of judgement.
When the cash flows of insurance contracts in a group affect the cash flows to
policyholders of contracts in other groups (see 11.1 above), an entity should assess
whether the conditions for meeting the classification of the group of contracts as
insurance contracts with direct participation features are met by considering the cash
flows that the entity expects to pay to the policyholders. [IFRS 17.B103].
11.2.2
Measurement of the contractual service margin using the variable fee
approach
At initial recognition, the contractual service margin for a group of insurance contracts
with direct participation features is measured in the same way as a group of insurance
contracts without direct participation features (i.e. as a balancing figure intended to
eliminate any day 1 profits unless the contract is onerous – see 8.5 above).
At the end of a reporting period, for
insurance contracts with direct participation
features, the carrying amount of a group of contracts equals the carrying amount at the
beginning of the reporting period adjusted for the following amounts: [IFRS 17.45]
• the effect of any new contracts added to the group (see 6 above);
• the entity’s share of the change in the fair value of the underlying items (see 11.2.1
above), except to the extent that:
• the entity opts to and applies risk mitigation (see 11.2.3 below);
• the entity’s share of a decrease in the fair value of the underlying items
exceeds the carrying amount of the contractual service margin, giving rise to
an onerous contract loss (see 8.8 above); or
• the entity’s share of an increase in the fair value of the underlying items
reverses any onerous contract loss above;
• the changes in fulfilment cash flows relating to future service, except to the extent that:
• risk mitigation is applied (see 11.2.4 below);
• such increases in the fulfilment cash flows exceed the carrying amount of the
contractual service margin, giving rise to an onerous contract loss (see 8.8
above); or
• such decreases in the fulfilment cash flows are allocated to the loss
component of the liability for remaining coverage;
• the effect of any currency exchange differences (see 7.3 above) arising on the
contractual service margin; and
• the amount recognised as insurance revenue because of the transfer of services in
the period, determined by the allocation of the contractual service margin
remaining at the end of the reporting period (before any allocation) over the
current and remaining coverage period.
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IFRS 17 further states that:
• changes in the obligation to pay the policyholder an amount equal to the fair value
of the underlying items do not relate to future service and do not adjust the
contractual service margin; [IFRS 17.B111] and
• changes in the entity’s share of the fair value of the underlying items relate to future
service and adjust the contractual service margin. [IFRS 17.B112].
Changes in fulfilment cash flows that do not vary based on returns on underlying items
comprise: [IFRS 17.B113]
• the change in the effect of the time value of money and financial risks not arising
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 899
